OFT to allow 'opting out' of overdrafts

Banks should offer customers accounts which allow them to 'opt out' of overdraft facilities and no longer run into huge debts through bank charges, the Office of Fair Trading said today.

Draft pick: Customers can turn down offer of overdraft.

It means that customers who choose to opt out of the overdraft will have transactions refused if it means they exceed their agreed limit - removing the possibility that they could incur costly bank charges.

Unveiling its recommendations on the future of bank charges, the consumer watchdog said it would like to see options for those who do not want unarranged overdrafts, as well as greater choice surrounding charging structures.

It also wants improvements on the level of fees for unarranged overdrafts, but the OFT revealed that charges have already been coming down.

This has come as banks feared a crackdown following the bank charges test case, which was finally lost by the OFT late last year after banks repeatedly appealed rulings against them.

Bounced charges, levied when a bank refuses to make a payment, have fallen from an average of £34 in 2007 to around £17.

And customers who go into unauthorised overdraft have seen the average penalties ease back from £30 per transaction in 2007 to around £22, according to the OFT.
The OFT insisted that said it still had the ability to correct unfairness in bank overdraft fees which it had fought doomed a three legal battle against. The OFT said it expected 'significant developments' on bank charges in the next two years and threatened statutory legislation if banks failed to deliver.

Millions of customers were left unable to reclaim money paid out in charges after the ruling, which deemed that the charges did not come under 'unfair contract' rules, meaning they were not subject to OFT regulation.

But the OFT said its probe into the current account market has already 'triggered substantial changes', with banks signing up to a raft of commitments today which it hopes will lead to further improvements.

Peter Vicary-Smith, chief executive of consumer association Which?, said: 'The OFT has found improvements in the way some banks are charging their customers, and we welcome the changes the banks have made. Those who haven't yet joined in and improved their charging structures need to wake up and smell the coffee.

'We will continue to hound those dragging their heels and still believe that the changes we're proposing to the Financial Services Bill* will help the OFT.'

John Fingleton, chief executive of the OFT, said: 'We believe that the commitments agreed by the industry today, along with changes by individual banks already made or expected in the next two years, should lead to a market that works better for consumers.

'We will continue to closely monitor the banks and will reconsider the need for action, including legislation, if they fail to deliver these changes.'

Banks committed today to develop minimum standards when offering customers the ability to opt out of unarranged overdraft facilities, while they will introduce best practices for customers in financial difficulty who incur unarranged overdraft charges.

The industry will also set up an industry working group to look at ways to give customers better real-time information on their accounts and greater control. The OFT stopped short of placing any limits on the size of overdraft fees - a market which generates around £2.6bn of revenue a year for high street banks.

The OFT is hoping that new players entering the banking sector - such as the imminent expected arrival of Virgin Money's bank and the London-focused Metro Bank - will ramp up competition and see consumers able to switch to get the best deal.

It is launching a short review looking at the barriers to entry in the UK banking sector and hopes to report back in the next couple of months.

The British Bankers' Association (BBA) said: 'Retail banking is highly competitive and this competition for customers has resulted in some dramatic initiatives from banks, some of which have been highlighted by the OFT today.'

It added: 'Banks are committed to ensuring customers understand how banking services work and that when the customer is charged a fee for a service, the charging structure is fully understood.'

Abbey and Alliance & Leicester owner Santander welcomed the OFT proposals, saying they will 'encourage more customers to seek out a more competitive deal, be it for in credit interest or overdraft charging structures'.

Customers need to be able to say I don't want more money

Simon Lambert, assistant editor, at This is Money says: The OFT's suggestions that customers should be able to opt out of unarranged overdrafts is long overdue.

For too long banks have profiteered by lending customers money they shouldn't have access to and then ripping them off with massive charges. We campaigned for fairness on bank charges for this very reason.

People must take responsibility for their spending and make sure they know their limits, but banks have made handsome sums from repeatedly pushing customers into more debt then loading £30-plus charges on them and even hitting them with fees on those charges.

Currently, you pretty much have two choices. One is to take a normal bank account you can use anywhere and run the risk of your bank allowing you to dive deep down beyond the overdraft you have agreed into even more debt. And then get charged the equivalent of a colossal rate of interest for it.

The other is to have a basic bank account, which won't let you do this, but is essentially rubbish.

The banks know which one you'll choose and their profits and failure to introduce meaningful controls show which one they prefer.

For those who do not go overdrawn, the bank charges question affects them too. It is a moral question of do you want your bank to treat others unfairly? That is what has been happening and the sooner it stops the better, because until banks start being more responsible on debt, sadly people will keep running up more and more.